Silicon Motion: Buy This Dip
Summary
- Silicon Motion reported preliminary Q2 results below expectations.
- Shares are down 16% over the past three months, presenting a buying opportunity.
- With a NAND production recovery expected in 2H 2017, SIMO looks to be attractive at current price levels.
Silicon Motion (NASDAQ:SIMO) reported preliminary second quarter 2017 results Friday that were below expectations, opening up what I believe to be a buying opportunity. Revenue came in below the low end of management's guidance range and below the consensus analyst estimate, gross margin came in at the low-end of guidance, as shares fell more than 6% in response. This brings SIMO's total decline to 16% over the past three months, which I think has brought the stock to an attractive price level.
SIMO data by YChartsRevenue for Q2 will come in slightly below the guidance range of between $134 million and $140 million and below the consensus analyst revenue estimate of $136 million, indicating that the tight NAND supply environment hurt Silicon Motion again in the quarter. Gross margin took a hit as well, coming in at the low end of 48.5%-50.5% guidance.
Again, the reason for the weakness is likely the tight supply of NAND chips, which is helping average selling prices but hurting volume sales of Silicon Motion's controllers. This environment has led to a general sentiment of malaise surrounding SIMO shares, which are currently valued at a forward P/E a tad over 10 despite the company expecting a strong 2H 2017. While this seems cheap, whether shares are undervalued really depends on how the NAND market will turn out over the next few months.
While Q2 was not encouraging, Silicon Motion is poised to turn in a much stronger performance in the second half of 2017. Micron Technology (MU), a leading producer of DRAM and NAND, said on its latest conference call that it expects NAND supply to expand and to outstrip demand over the next few months. This supports statements made by Silicon Motion's management as well who stated on the last conference call multiple times that they expect sales to strengthen significantly in 2H 2017 due to product launches and more robust NAND supply growth.
3D NAND is just getting off the ground and demand is expected to grow at a solid CAGR for years to come:
There will be some short-term pain as 2D NAND demand and supply decline sharply, but 3D NAND will more than make up for any suffered losses.
For FY2017, Silicon Motion is expecting annual revenues to increase between 0% and 10%, which represents revenue of $554 million and $609 million, respectively. While this growth, or lack thereof, seems a bit lackluster, FY2018 is shaping up to be more promising due to the 3D NAND ramp with an analyst EPS estimate of about $4.20 for the year, or YoY growth of about 16%. The upcoming demand and supply landscape in NAND seems to affirm this scenario. Additionally, long-term NAND is a near shoe-in for further growth, though cyclicality will likely be a factor.
From an investor perspective, I think SIMO is an attractive short-term and long-term play due to the expected 2H 2017 strength and growth estimates for NAND, specifically of the 3D variety, over the next few years. At Friday's closing price, shares are trading at just 10 times FY2018 earnings, which seems pretty cheap considering the growth we're likely to see in the coming quarters.
I will be buying call options sometime during the coming week, likely with a duration that stretches out a few months. I think the looming sales recovery in 2H 2017 will give the stock some positive momentum while optimism over FY2018 results adds to bullish sentiment. Additionally, if these options end up being profitable, I will consider exercising them and holding the shares into 2018 rather than selling them, but I will re-evaluate that decision at a later date.
For now, I am bullish on SIMO going into 2H 2017 due to improving prospects for NAND supply growth and due to the stock's current low valuation. In my opinion, this looks like a good buying opportunity for both short-term and long-term investors looking for an entry point or for a price point to add additional shares.
Best of luck!
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Analyst’s Disclosure: I am/we are long MU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Will initiate SIMO calls.
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